- Sprint is getting analysts' support for its latest network upgrade.
- Sprint's plan is to move off towers and onto lower phone poles.
- Sprint though, doesn't have the political clout needed to make the plan work.
When Softbank CEO Masayoshi Son bought Sprint (NYSE:S) and announced that he would use his profits from Alibaba (NYSE:BABA) to build the first global cellular carrier, I really thought he would do it. He had deep pockets and the example of his home base, Japan, where Softbank muscled aside two regulated carriers to become the nation’s largest, within a fairly short time.
Now, I’m not so sure. Sprint pre-announced its earnings this week to report a loss of 21 cents per share on revenue of $8.11 billion. Sprint estimated its Earnings Before Taxes, Interest, Depreciation and Amortization – the EBITDA, so beloved to analysts assessing buyouts – may come in as high as $8 billion. Seen against a market cap of $11.4 billion, this is supposed to be a buying opportunity, and the initial reaction on 26 Jan 2016 was a gain of 13% for the stock in the pre-market. A JP Morgan Chase (NYSE:JPM) analyst even pounded the table for the stock, calling its moves “steady and sure progress.”
Look inside Sprint’s plans, however, and you see a beleaguered financial army preparing for one last charge against stiff resistance (Americans should think George Pickett from the American Civil War). Sprint is going to war against both local regulators and incumbent carriers, who also happen to be its two main competitors, AT&T (NYSE:T) and Verizon (NYSE:VZ). The plan is to move Sprint equipment off rented cell towers and onto smaller poles along city rights-of-way, giving it more network locations. From these locations, Sprint would provide its own backhaul and avoid dealing with both the tower owners and carriers’ networks, which it says costs too much.
In theory, this is a good plan. In practice, this is going to be a disaster. As iGR analyst Iain Gillott notes, those competitors not only control the needed right-of-way, but have deep-pocketed contacts with the local and state regulators needed to free them up for Sprint’s use. They also have no incentive to cooperate with Sprint’s plan. This will be a bureaucratic war, waged city-by-city, state-by-state, and Sprint is out-gunned.
At the same time, Sprint is drastically cutting head count to save $1 billion and conserve its $2.2 billion in cash and will sit out the next government spectrum auction, which is focused on old TV spectrum that can be used to create blanket coverage across cities.
It’s a bold plan from a technological perspective, and looks good on paper. But in the trench warfare of urban policy, against well-armed lobbyist opponents, it is doomed.
The optimism being drummed up by Sprint's management over its plan sent the stock to a near $3/share. When I last wrote about Sprint in mid December, Sprint shares were at about $3.55. In that piece, and I saw Sprint stock heading higher. Upon reviewing Sprint’s plans in detail, I now believe I was wrong. It’s time to take your losses.